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Corona Capital

21 October 2020 By Breakingviews columnists

Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


– Abbott Laboratories

– Bounce Back Loan Scheme

– Manchester United

Test, test, test. Everything is coming up positive for Abbott Laboratories. The $190 billion U.S. healthcare conglomerate’s third quarter showed insatiable demand for Covid-19 tests as well as a recovery in medical device sales from postponed surgeries. That pushed sales up about 10% and earnings per share 30% compared to the same period last year. And Abbott raised its annual forecast thanks to rising confidence that there will be of more of the same for the rest of 2020.

With widespread vaccination still distant, the Covid-19 tailwind will blow for several more quarters. The number of cases is rising again in much of the northern hemisphere. That’s mostly, but not entirely, positive for Abbott. Surgeries will probably once again be put on hold. But most operations will eventually be done. More importantly, diagnostics accounted for nearly all growth compared to last year. The higher new cases rise, the more Abbott’s profit will too. (By Robert Cyran)

Bounceback splashback. Britain’s banks may have come up with a neat workaround to avoid a post-Covid public relations disaster. According to the Times, trade body UK Finance is overseeing plans to establish a joint collection agency for the state-backed 38 billion pound Bounce Back Loan Scheme. That would avoid the awkward scenario of individual banks chasing struggling hairdressers and cafés for cash they may not have – a scenario that seemed possible after finance minister Rishi Sunak rebuffed the idea of a government-run collections agency.

Sunak may yet regret his decision, however. The banks have little interest in setting up a body that ruthlessly pursues borrowers, since they can claim back any loan losses from the government. It’s possible that the Treasury ends up with a huge bill. The finance minister can’t dodge his responsibility by pretending it’s the banks’ problem – especially as the scheme was his in the first place. (By Liam Proud)

Back of the net. Manchester United’s patchy on-pitch form has extended to its finances. The UK-based soccer club reported a 23 million pound net loss in its financial year on Wednesday as lower revenue from broadcasting and gate receipts hit the top-line. Equally worrying was a precipitous rise in leverage as the pandemic led to deferred sponsorship payments and lost season ticket sales: net debt stood at 474 million pounds, or nearly 4 times trailing EBITDA.

There’s reason to hope for an 89th minute turnaround. The Red Devils managed to grow sales from sponsorships and retail – over half of total revenue – by 1.4% year-on-year. The team which includes French midfielder Paul Pogba qualified for the pan-European Champions League, meaning greater TV money. Deloitte reckons the latter will grow by 68% this season for England’s Premier League collectively, which would more than offset Manchester United’s matchday sales last year. And if a newfangled FIFA-backed European club championship ever happens, Manchester United will definitely be in it. (By Christopher Thompson)

Old normal. Swedish private equity giant EQT is spending again. The 16 billion euro group run by Christian Sinding invested 6 billion euros in the third quarter of 2020, compared with 3.4 billion euros in the same period a year earlier. That compares with a one-fifth slump for the European private equity market as a whole, according to PitchBook.

One possibility is that Sinding’s EQT is a leading indicator. Buyout groups have raised a lot of money in recent years, but won’t earn big fees unless they spend. The alternative is that it is imprudently splashing cash before it’s clear what the post-virus world will look like. EQT is investing in buzzy trends: 80% of investment over the past 12 months has gone into healthcare, media, telecommunications and technology, which often carry high valuation multiples. Mid-crisis investing has worked for private equity groups in the past – but only when the assets are going cheap. (By Liam Proud)

Beware the Dragon. Ericsson’s impressive earnings uplift may be short-lived. The Swedish telecoms provider’s share price rose 7% on Wednesday after strong sales in China saw the group report a meaty 8.6 billion Swedish crown ($985 million) operating profit for the third quarter, compared with a loss in the same period in 2019. Despite the pandemic, Chief Executive Borje Ekholm was upbeat about the outlook for 5G contracts in mainland China, a crucial source of earnings growth, given that the country accounts for roughly the entire projected global expansion in 5G network equipment this year.

Such optimism could prove ephemeral. Barely 24 hours earlier, Sweden joined other European countries in banning China’s Huawei Technologies and ZTE from developing its domestic 5G network due to security concerns. Given that Huawei is Ericsson’s biggest rival, the Swedish company may face a stiff reaction from Chinese regulators, who have already called for stricter supervision of foreign telecoms operators. Ericsson shareholders have been forewarned. (By Christopher Thompson)

Rare opportunities. Australian rare-earth producer Lynas enjoyed a recovery in the first quarter of fiscal 2021, despite and because of the virus. Easing Covid-19 restrictions Down Under and in Malaysia finally allowed production to rev up: the company pointed to a 73% quarter-on-quarter increase in its output of neodymium and praseodymium, vital ingredients for magnets, iPhones and electric cars. Chief Executive Amanda Lacaze also argued in her results review that the pandemic’s squeeze on supplies might push buyers to diversify their sources of rare earths beyond China.

That’s talking her own book, but it holds an element of truth. Washington is keen to lessen its dependence on the People’s Republic, the world’s largest producer of rare earths. Investors seem to buy the thesis, pushing Lynas shares up 4% in Sydney on Wednesday. But the coronavirus is still a wild card. Another outbreak could crimp operations and demand. (By Katrina Hamlin)


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